AT&T, BT link. Bell Atlantic, GTE next? 7-27-98

CBS.MarketWatch.com

NEW YORK (CBS.MW) -- Multi-billion dollar telecommunications deals showed no sign of slowing on Monday amid reports Bell Atlantic and GTE are talking of linking forces in a merger that could be valued as high as $55 billion.

The reports come a day after AT&T Corp. (T)
T, +0.38%
and British Telecom (BTY)
BTY, +15.71%
confirmed plans to link their international operations to create a company with $10 billion in sales.

Pooling resources

U.S. phone companies like Bell Atlantic (BEL)
BEL, +0.81%
and GTE (GTE)
GTE, +1.55%
are anxious to forge ties with big players to stay competitive in the phone market, and to pool capital investment resources.

The refrain isn't new to telecom analysts, who've been watching the major players shift partners and announce services pacts at a fast clip over the past year.

"Any company that wants to become a global company five years from now -- and there will probably only be a handful -- needs to get a lot bigger pretty quick," said Mel Marten at Edward Jones.

Joining GTE would give Bell Atlantic access to the long-distance market -- a first time for a Baby Bell. Newspaper reports said the pact could be announced as soon as this week. Both companies declined comment on the report.

'Plausible' alternative

Such a merger is a "plausible" alternative for Bell Atlantic, said Robertson Stephens analyst Tom Horan. "Everyone is talking to everyone else," he said. "It makes a lot of sense, but Bell Atlantic-Bell South (BLS)
BLS, -3.70%
made more sense."

Bell Atlantic's stock fell 3/16 to 45 on the reports. GTE's lowered 2 3/16 to 55 3/4. The Wall Street Journal reported that the talks are focusing on a stock merger that would value GTE at less than $56 billion, its market cap on Friday.

Yet, even if the two companies agree to merge, some analysts are expecting regulatory hurdles. Possible problems with the regulators put a damper on the stocks, they said. None of the baby bells have been allowed to get into the long distance business.

"A merger would give (Bell) a lot of control over the local lines and the ability to offer long distance nationwide," Marten said. "I think this merger would receive the harshest regulatory review that we've seen so far. I think it's chances would be just higher than 50-50."

Together, the two would control about one third of U.S. residential lines, he said.

Bell South gained 3 3/16 to 72 3/16. US West (USW)
usw
was up 1/4 to 53 11/16. The two are seen the last remaining unaligned local phone companies. Telecom companies tracked by the Philadelphia Telecom-Phone index ($PNX)
$pnx
were up 0.5 percent.

Internet pact

On Sunday, AT&T and BT confirmed they are peeling off their international networks and traffic to form a $10 billion joint venture focused on multinational business customers and e-commerce that will be based in the U.S.

Moreover, the two telephone giants are pooling investments in technology to build an Internet service that carries voice, data and video at a high rate of speed targeted at businesses in 100 cities.

AT&T's (T)
T, +0.38%
stock rose 1/16 to 60 points, while BT's stock climbed over 10 percent to a record high in London. BT's ADRs rose 8 3/8 to 146 1/8. BT is contributing fewer assets to the 50-50 joint venture than AT&T.

The two companies said they will turn over more than 250 of their largest multinational business customer accounts to launch the new, as-yet unnamed venture. The venture is expected "to lead to modest earnings accretion" for shareholders in the first year. See company statement.

While the companies expect regulators to back the venture within 12 months, telecoms analyst Jeffrey Kagen said over the weekend that the two companies "are in denial" if they believe regulators will bless the pact.

The companies expect venture to deliver operating profits of some $1 billion in its first full year, growing between 15-20 percent a year. Revenue, expected to reach $10 billion in its first year, are seen increasing over 15 percent a year.

Other highlights of the venture include:

An international wholesale carrier business to offer low-cost routes for phone and Internet service providers.

Investment of $500 million each in U.S. businesses involved in high technology and emerging communications markets.

An expansion of BT's Concert ISP business, expected to contribute revenues of $3.5 billion a year, growing in excess of 25 percent a year.

Targeting of the financial, oil and information technology industries.

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